It’s a frustrating time to be a saver. Inflation has reached its highest level in three decades, while banks have been very slow to pass on the three rises in interest rates since December.
As the deadline approaches for investing this year’s Isa allowance, how can you best protect your money from rising prices?
The answer is not in cash Isas, now typically paying less in interest than regular savings accounts. With consumer prices rising by 6.2%, the stock market might be the best chance of inflation-beating returns. But where to invest and how?
Some aim specifically to beat the rate of inflation. The Trojan Fund, from Troy Asset Management, comes recommended by Hargreaves Lansdown. It is based on four “pillars” of investment: large established companies it thinks can grow long term; government bonds; gold-related investments, and cash.
In the last year it is up 12%, with an 0.86% charge which Damien Fahy, of finance site Money to the Masses, says is “reasonable”.
Tracker funds, also known as index funds, track a broad market or a segment of a market. AJ Bell’s Laith Khalaf says they are a simple, low-cost option which can give instant diversification. He recommends the Fidelity Index World Fund, which has an annual charge of 0.12%.
“There is no special inflation strategy, you’re just investing in the whole market and relying on rising share prices to lift your returns above inflation in the long term,” he says. “One risk of this approach is that currently around two thirds of the global stock market is made up of US companies, so you’ll have a lot of eggs in one regional basket.”
It is up 14.9% in the last year.
The commitment to slow climate change, and a shift to more sustainable energy systems, has created possibilities, says Rob Morgan at wealth management firm Charles Stanley.
He highlights Schroders’ Global Energy Transition Fund, which aims to invest in between 30 and 50 companies focused on moving to a low-carbon economy. Those involved in nuclear energy and fossil fuels are excluded. After growing 143% between 2020 and 2021, it is down 10.3% in the last year.
Morgan says: “They are specialist and could be quite volatile, so should only be in small positions in a broader portfolio, and are definitely for holding on to for the long term.”
Stay in the black
Guinness leads the market in stout and has, historically, raised prices in line with the wages of manufacturing workers – giving owner Diageo a distinctive brand with loyal customers. Companies like this can be well positioned in an inflationary world, says Jason Hollands of Bestinvest, and he points to funds investing in similar companies resilient to changes in the economic environment.
The Liontrust UK Growth Fund is up 12.6% on the last year, with a recurring charge of 0.84%. It has 5% in Diageo and 6.6% in healthcare giant AstraZeneca. The TB Evenlode Income Fund is up 9.04% on last year, and has a recurring charge of 0.87%. It holds 8.2% in Diageo and 8.1% in consumer goods giant Unilever. Check the fact sheet on the providers’ websites – it will list the biggest holdings.
Value investing involves picking stocks seen to be trading at below their book value.
Dzmitry Lipski, head of fund research at Interactive Investor, says value stocks have the ability to increase profits above inflation and pay steady or rising dividends. Warren Buffet is seen as the leading investor in the field.
Artemis SmartGARP Global Equity Fund aims to invest in attractively valued companies, says Lipski, trading “at a lower valuation than they are intrinsically worth”. It is up 9.48% on last year, with a charge of 0.89%.
All that glisters?
Gold is often seen as the “safe haven” investment and, as a result, tends to thrive when the rest of the world is faltering.
The last year has seen its value rise by almost 17% – but it is volatile. Fahy highlights the Ninety One Global Gold Fund, which invests in the shares of companies involved in gold mining.
It is up 18.7% in the last year with a charge of 0.84%. “That is different from actually investing in gold, and gold-mining stocks can be even more volatile, especially if the price of gold falls,” he says.
How much should I invest?
Although the Isa deadline is fast approaching, you don’t have to commit all of your money to the stock market now. Sarah Coles of Hargreaves Lansdown says: “You can open a stocks and shares Isa on the platforms, then gradually drip-feed cash into stock market investments when it suits you.”
This has the potential advantage of avoiding losses if there is a fall, says Fahy. “Investors acquire more units/shares for their money as they drip in, perhaps using equal regular monthly instalments on the way down, boosting their return when markets eventually recover,” he says.
However, a study from Vanguard showed that lump-sum investing beat the drip-feed method over a 10-year period.
“The message is, you can’t predict the market, and if you are investing for the long term, time in the market is usually more important than timing your entry,” says Fahy.
Know the fundamentals
There are four types of Isas – cash; stocks and shares; innovative finance and lifetime.
Your £20,000 Isa allowance can be put into one type, or split. The limit for a lifetime Isa is £4,000 a year.
You don’t have to pay tax on interest earned, or income from investments
You must save or invest by 5 April each year. The unused allowance does not roll over.